Financial system stronger despite global stresses

Release date

07 November 2012

New Zealand's financial system has strengthened,
despite a challenging international environment, Reserve Bank Governor Graeme
Wheeler said today, when releasing the Bank's November 2012 Financial Stability
Report.

"Global economic activity is weak and this is affecting emerging
markets, including China. The euro area is fragile given the structural issues
facing the region and global growth could be further undermined by the
possibility of substantially tighter fiscal policy in the United States,"
Mr Wheeler said.

Nonetheless, financial market sentiment has improved over recent months
reflecting further monetary easing in the major economies and various measures
to support the financially distressed euro area members. This has helped New
Zealand banks access global funding markets, but has also contributed to the
strength of the New Zealand dollar.

"Households and firms have generally continued to reduce their reliance
on debt. However, household debt remains at relatively high levels, with many
borrowers still vulnerable, especially to any correction in house prices.
Leverage in parts of the agricultural sector also remains high, leaving the
sector exposed to a fall in export prices," Mr Wheeler said.

Deputy Governor Grant Spencer said New Zealand's banks have continued
to build their liquidity and capital buffers, giving them greater ability to
cope with any renewed stress in funding markets or an increase in loan losses.

"Banks are well placed to meet the increase in the minimum core funding
ratio from 70 to 75 percent on 1 January next year," Mr Spencer said.

"We are continuing to strengthen the financial system, drawing on
lessons from the global financial crisis. We are implementing the main elements
of the Basel III capital adequacy regime as well as continuing to develop our
macro-prudential framework. Further, we are putting in place a new prudential
and licensing regime for the insurance sector, working with banks to
pre-position their systems for Open Bank Resolution and reviewing our statutory
powers for overseeing the payment and settlements system."

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